Well, it looks as though Facebook is shaping up to be the IPO Of The Century, after all.Demand was so strong that the underwriters reportedly closed the books two days early.
A senior stockbroker at a major US brokerage firm says he’s never seen such demand.
“Rich, older women” are apparently placing orders in droves, following Peter Lynch’s advice to “buy what you know.”
And so on.
And all this in the face of what can only be described as disappointing Q1 results for the company (see below), the revelation that super-fast-growing mobile is much less lucrative for Facebook than the desktop, and recent news that the third-biggest advertiser in the country, GM, has just pulled the plug on its entire $10 million Facebook ad campaign because it says Facebook ads don’t work.
Oh, and insiders have just jacked up the amount of stock they’re selling, taking advantage of the IPO frenzy to unload more shares.
But we don’t mean to rain on the parade.
It’s YOUR CHANCE TO STOP FEELING LIKE AN IDIOT FOR MISSING GOOGLE!
NO PRICE IS TOO HIGH!
We do feel compelled to ask those who are gleefully scarfing up Facebook stock at $100+ billion… Are we looking at the same set of financials?
We’re all for cashing in on “IPO pops”–and Facebook will probably have a nice one. But as for the after-market…
What if Facebook trades for, say, $125 billion after the IPO. All we can say is that, if investors willingly pay that price, they will be betting that Facebook can radically accelerate revenue growth over the next few years. Because the company’s current growth trends simply do not support that valuation.
Facebook’s growth rate in Q1 was a modest 45% year over year. (See the red line in the chart above. Click for ginormous chart).
That’s down from 55% in Q4 of last year, which itself was a sharp slowdown from the prior quarter.
Advertising revenue growth in Q1, meanwhile, was an even less impressive 37%. This for a company that many people keep saying is a huge threat to Google. For the record, Google’s display-ad business, which competes directly with Facebook’s display-ad business, is growing faster than Facebook’s.
(For comparison, Google’s revenue is also 10X as big as Facebook’s. And Google has more cash flow than Facebook has revenue. But the market is valuing Facebook at 1/2 of Google’s value.)
Facebook’s free cash flow, meanwhile, has gone negative: The company is now burning cash.
Because it’s spending so much on data centres.
If Facebook’s revenue growth doesn’t reaccelerate in the rest of this year, it will end up posting about 40%-50% growth for the year. That’s impressive growth for a normal company, but it’s not all that impressive for a company that will be trading with this valuation.
If Facebook achieves 50% revenue growth for the next two years (a modest acceleration), it will post revenue of about $5.5 billion in 2012 and $8.3 billion in 2013. At the same net profit margin that Facebook achieved last year, this will produce earnings of ~$1.7 billion this year and ~$2.5 billion next year.
At a $100 billion valuation–the expected IPO price–here’s what those multiples look like:
2011 Earnings: $1 billion 2011 PE: 100X
2012E Earnings: $1.7 billion 2012 PE: ~60X
2013E Earnings: $2.5 billion 2013 PE: 40X
For comparison, here are the multiples for another red-hot tech company, Apple:
2011 EPS: $35 2011 PE: 16X
2012E EPS: $44 2012 PE: 13X
2013E EPS: $50 2013 PE: 11X
So Apple’s trading at a P/E of 11X next year’s estimated earnings, and Facebook’s trading at a P/E of 40X.
A P/E of 40X isn’t ridiculous, but it’s expensive. And remember that that PE is on next year’s estimated earnings, which are still almost two years from possibly becoming reality.
Bottom line, if Facebook really is going to blow past Google and become the biggest Internet company on the planet, as many people keep predicting, it’s certainly not showing any sign of that yet. Facebook’s revenue is only growing 45% per year, and it’s still decelerating. And cash flow has turned negative.
But Facebook IPO buyers, apparently, will worry about those details later.
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